Central bank digital currency

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A Central bank digital currency (CBDC) is a cryptocurrency or other digital currency issued by the central bank of a jurisdiction. At the time of this entry (January 2020), CBDCs had been heavily discussed in many countries but not yet realized anywhere.

Overview

In early 2020 the Bank for International Settlements (BIS) joined with the the U.S. Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Swedish Riksbank and the Swiss National Bank to share their assessments of and experiences with potential use cases for central bank digital currencies.[1] In January 2020 it reported results covering 66 central banks, 80% of which are engaged in CBDC activities. 40% of the respondents also reported being engaged in experiments or proofs of concept, and another 10% of them had launched pilot projects.[2]

In January 2020, the World Economic Forum published a framework for central banks addressing the benefits and risks of CBDCs. The "CBDC Policy-Maker Toolkit" includes 28 pages of information about the retail sale of digital currencies, cross-border CBDCs, and "hybrid" CBDCs. "Hybrid CBDCs" refers to privately-created and managed digital assets tied to monetary reserves. The document includes cost-benefit analyses, current regulatory and other CBDC challenges, and other important factors deemed necessary to consider before adopting a CBDC. The Toolkitasserts that CBDCs can reduce the costs associated with cross-border payments, although, only in countries currently without efficient systems. CBDCs may not add much value. More than 40 banks, academic researchers, and financial institutions joined in the production of the Toolkit.[3][4]

In August 2020, the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT) announced a partnership to research the development and implementation of central bank digital currencies.[5]

October 2020

In early October 2020, the central bank of Estonia launched a research project to assess whether KSI Blockchain, which was already used by the Estonian government, could be used to launch a CBDC.[6] News also broke around the same time that the People's Bank of China had carried out 1.1 billion yuan, or $162 million, worth of transactions on its pilot CBDC, which was reportedly near launch.[7]

On October 9, BIS published a report laying out the feasibility of releasing publicly-available CBDCs. The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, Sveriges Riksbank (the central bank of Sweden), and the Swiss National Bank contributed to the BIS report, which laid out three key principles necessary for a CBDC to follow:[8]

  • Coexistence with cash and other types of money in a flexible and innovative payment system.
  • Any introduction should support wider policy objectives and do no harm to monetary and financial stability.
  • Features should promote innovation and efficiency.

The ECB released its own report that month on the feasibility of central bank digital currencies that month as well.[9] After its publication, the Financial Times reporter Martin Sandbu wrote that based on the report, he expected to see the ECB launch a centralized digital currency by 2025.[10][11]

Later that month, during an IMF panel, U.S. Fed Chairman Jerome Powell said that there were a number of ways in which adopting a central bank digital currency "might improve the payment system," and that it "is this area that motivates our interest." Although Powell said that such a technological implementation was on the Fed's radar, there was still a lot of work to do to make sure the Fed could begin planning to create and launch such a currency effectively. "Getting it right means that we not only look at the potential benefits of the CBDC, but also the potential risks and also recognize the important trade-offs that have to be thought through carefully,” Powell said.[12][13]

References